Market-based solutions will help us get cheaper energy transition

Since voting for Brexit, the UK has probably gone even more ambitious in terms of its climate action. The government is aiming for nuclear to be a quarter of our electricity mix. The UK Labour and Conservative parties are both committed to building nuclear power stations. But it won’t be as much of a contribution to the energy system as wind and solar. Carbon pricing is one of the most conservative approaches to climate action because it lets the business to reduce the emissions in whatever way they deem to be the most fit. Sam Hall, Director of the Conservative Environment Network and a former Policy Adviser to the Environment Secretary, talks to Michal Wojtylo about British perspective on the green transition.

Michal Wojtylo: In Poland, sometimes you can hear an opinion that because the EU-led green transition is going to be a huge cost, if it is not possible to alter the European Green Deal maybe we should leave the EU in the medium term. You are from the UK, the first country that left the EU. How would you compare your climate and energy policy before leaving the EU and after Brexit? Did something change?

Sam Hall: From a climate policy standpoint, the main policy framework that we have had was the 2008 Climate Change Act, which set a long-term, legally binding target to reduce emissions by 80%, set up an independent advisory committee, the Climate Change Committee, to advise the government on interim targets and progress. That piece of legislation, backed by the Conservatives and Labour, was entirely separate from the various EU measures, and      went further than what we were obliged to do as members of the EU.

When discussing costs, we have to remember the reason why we are embarking on this energy transition. That change is not out of any great sort of benevolence or desire for a kind of pristine environment necessarily. It comes predominantly from the awareness that the costs to our economy, to our society, of allowing this problem to continue unchecked would be far greater than the upfront costs of moving to a clean energy system.

Whilst those costs in the future are many years away in terms of when they will get really big and the investment costs are right now, the green transition      is still a very economically rational thing to do. If we want to minimize costs for multiple generations and for society overall we must move in this direction. Even now, at 1.1 degrees of global warming, we are already seeing how climate change is hitting the cost of living for people. If we do not tackle it, it is going to get much worse, particularly for the poorer households.

Thinking in this way has led us to a situation where since voting for Brexit, I would argue the UK has probably gone even more ambitious in terms of its climate. It sets a net-zero target enshrined in legislation before the target was adopted by the whole EU. This was partly for economic reasons, as we saw an opportunity to get a first mover advantage in industries like offshore wind and carbon capture, and partly to demonstrate the UK’s continued international leadership post-Brexit. In the run-up to      the COP26 climate summit in Glasgow, and having set that net zero target a couple of years previously, Boris Johnson’s      government put in place a big comprehensive net-zero strategy with an outline of how the country would meet its targets.

Brexit has not led to a decrease in terms of the pace of decarbonisation, but we have been able to exercise more sovereignty over the specific policies to achieve it. We have continued with some of the measures that we had within the EU – for example we have set up our own emissions trading system in the UK. A big difference from the one in the EU is that we have aligned the cap on emissions with our net-zero target, which we hope will enable the emissions trading scheme to play a fuller role in reducing emissions in a market-friendly way.

Carbon pricing is one of the most conservative approaches to climate action because it creates the incentives for the business to reduce emissions in whatever way they deem to be the most efficient and the cheapest, rather than the government picking winners or subsidising favoured technologies.

Outside the EU, the UK has been able to cut emissions faster from buildings by removing VAT (sales tax) on energy efficiency products and by reforming our farming subsidies to reward farmers more generously for more climate-friendly practices.

Could you compare the new British ETS with the one we have in the EU? Is the pricing similar?

The price is a bit lower in the UK ETS at the moment because of the recent actions of the government concerning free allowances. One difference is that the EU is bringing in transport and buildings into the ETS. The UK has not decided to do that for now. We are looking at bringing      shipping and waste into the ETS as part of our next expansion, as well as ending the free allowances for aviation. We already have a quite high level of fuel duty on our petrol and diesel. For buildings there is a recognition that people are really struggling at the moment, and it would not be right during a cost-of-living crisis to further exacerbate that through an additional carbon measure.

Yesterday at our conference, we had a panel about energy poverty and increasing the efficiency of buildings. What is the UK’s experience in tackling the energy poverty and overall rising energy bills for households?

It is critical that as we transition to a clean energy system, it does not push up energy poverty and create affordability issues for people on lower incomes. Since the Russian invasion of Ukraine, across Europe, gas prices have shot up. It has shown us that whilst there are times when gas has been cheap, when you have got unsteady geopolitical conditions, ultimately there is always a risk of price spikes if your economy is dependent on gas.

Last year, due to the gas price spike, the UK government paid half of everyone’s energy bills. The first thing that we should all look to do now is to move away from volatile fossil fuel markets by investing in domestic sources of clean energy. Whilst there are definitely upfront investment costs associated with moving to renewables, nuclear, upgrading the grid, and to getting the balancing and storage technologies, that system is much less susceptible to those big price shocks. We have got to learn the lessons from this crisis that we cannot stay dependent on fossil fuel markets, which dictators like Putin and other undemocratic regimes around the world have control over because of the size of their fossil fuel reserves.

The UK has done tailored support in the form of kind of cash vouchers for people in energy poverty that has helped them afford their heating bills over winter. Also, we have done energy efficiency schemes which is the most attractive option in that it creates a longer-term solution which has a climate benefit as well. We have to stop energy from leaking from our buildings just because they are poorly insulated.

Proper renovation can cut even 70% of the energy consumption for the house.

Exactly, so we have got to focus on that. In the UK, we have specific energy efficiency grant schemes. There is a requirement for energy companies to provide insulation measures for their energy-poor customers. It has resulted in some increase in energy efficiency levels across the housing stock and has protected some energy-poor households.

However, there is still a lot more to do. One of the areas where the UK government has not done enough in recent years has been energy efficiency. Rightly, a lot of money went into helping people with their unexpectedly high energy bills last winter. But at the same time we did not invest enough in long-term energy efficiency, which is a much more permanent solution.

We have to do the green transition, but we have to do it in a way that is fair and affordable and protects people on lower incomes. And for me, market-based solutions, those which bring private sector innovation and competition to bear on these problems will mean cheaper solutions for consumers as well will help us get a cheaper transition than a more inefficient state-led transition.

Talking about the state-led transition, in Poland, we are talking a lot about a government programme of building traditional, large-scale nuclear power plants. There is huge public support for it especially after the Russian large-scale invasion on Ukraine. The UK has quite a recent experience in building new nuclear reactors. What did you learn from these projects?

The government policy in the UK for a while now has been to pursue a mixture of energy technologies in order to get a balance across the grid and to have a more resilient energy system as a result. There has been huge progress on renewables, and the big growth in our power supply in recent years has come from particularly wind, both onshore and offshore.

Additionally, the government has sought to kick-start again the      nuclear industry. The UK has had a long tradition of nuclear power stations dating back many decades, and most of the current fleet of nuclear reactors is due to close down within the next ten years. Both from an energy security perspective, but also from a climate perspective and from a jobs perspective, because these nuclear power stations tend to be big employers in the areas that they are based, there was a desire to get a new generation of nuclear power stations built. The main one which is in construction at the moment is called Hinkley Point C in Somerset.

The price that the government paid for the power guaranteed from that power station was relatively quite high. That is because it was the first of a kind, and lots of the skills in the nuclear industry had been      lost. The other reason was that the government refused to co-invest in the building of the power station, or refused to underwrite some of the construction risk.

For the next project, the government has looked to change that and is now said that it is open to taking a stake in nuclear power stations, and it is also said that it would allow some subsidy to go to the developers during the construction phase as well, to help make that a less risky enterprise. So the hope is that when the next nuclear power station is commissioned, it is supposedly going to be Sizewell in Suffolk, that will result in lower costs overall.

The key thing for lowering nuclear build costs, based on the experience of other countries like South Korea, is building a fleet of reactors of the same design, so you can learn by doing and spread the initial high costs of getting regulatory approval over multiple projects. In the UK, our slow planning and regulatory systems are also a major additional cost.

What about the SMRs?

This is a competition which the UK government has launched to try and get all the different companies around the world who have got small modular reactor designs to submit them for review and to see which are going to be the cheapest. There is a UK-based company, Rolls-Royce, that has a design and for industrial strategy reasons, the government would quite like to give them a chance to develop a small modular reactor.

However, it is important for competition that you also see what other countries are able to do in terms of reactor designs. Beyond the Sizewell project, probably the next few nuclear reactors will be of the small modular kinds and will be slightly smaller scale in the hope that it has slightly lower construction risks and enable projects to benefit from economies of scale.

Ultimately, the government is aiming for nuclear to be a quarter of our electricity mix. The UK Labour and Conservative parties are both committed to building nuclear power stations. But it will not be as much of a contribution to the system as wind and solar. We keep building onshore wind and offshore wind and solar in the meantime.

You started to talk about the consensus between the Labour Party and the Conservative Party. Probably Labour is going to sooner or later take power in the UK. Do you expect any changes in energy and climate policy under the Labour’s rule?

Fortunately, in the UK there is an agreement between the parties on the need to reduce emissions and tackle climate change. Although, there are differences of opinion on how to do that and what the right balance between the market and the state role is in the transition.

One big difference between a Labour government and a conservative government in the next parliament would be around borrowing money to inject more public investment into green projects. Labour have said they would borrow an extra 28 billion each year by the end of the next parliament, in order to finance some of those green projects.

Whereas, the conservative approach has been much more about trying to get private finance to invest in green infrastructure and technologies and to not crowd out the private investment. To be clear, some government support and investment in order to scale-up technologies that are still slightly higher up the cost curve, not mature yet, for example in the heating space or carbon capture, is needed. Labour plans a much bigger role for public investment.

Another difference is that Labour would set up a state-owned energy company called Great British Energy.

Like EDF in France after renationalisation?

Similar but they would build a new company, not nationalize an existing private one. This company would take stakes in offshore wind farms, and be active in the supply chain as well for some of these technologies.

The problem this would try to solve is about the lack of a UK headquartered renewables developer. We import a lot from Scandinavia, for example, for our offshore wind sector. There is an awareness that we need to create more jobs and more UK industry off the back of the transition.

My feeling is that is not necessary and that the more conservative approach would be to look at how we can create a more attractive investment environment for private companies to come into the supply chain. We need to look at the planning system, how quick it is to get permission to build a factory, how long it takes to get a grid connection, and what is the tax regime. Are we incentivizing investment, particularly at a time when there are some really generous subsidies on offer from the United States for some of these supply chain companies to set up? Also, we need to look at skills and at our infrastructure around transport and ports. That is the role of the government – to create an attractive environment for private investment rather than actively trying to take stakes in these industries.

Sam Hall – Director of the Conservative Environment Network and a former Policy Adviser to Michael Gove when he was Secretary of State for the Environment, Food and Rural Affairs. Former the Head of Research at the liberal conservative think tank Bright Blue, leading their work on energy and the environment.

The interview is also available in Polish here.

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The article is published in a project partnership with the Poland from Nature [Polska z Naturą] Foundation, which is part of the Our Common Home network, that included organising a conference, 'Energy Security in Central and Eastern Europe. Achieving our Climate and Security Goals Together’ (link to its main conclusions here).